CIE Automotive, S.A. (CIE) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the results for the second quarter of CIE Automotive. Today, we have Jesus Maria Herrera, CEO; and Lorea Aristizabal, Director for Corporate Development. [Operator Instructions]. And now I'll hand over to Lorea. Go ahead, please.

Good afternoon, everyone. We are here to talk about a successful quarter that we'll look into little by little, and we'll start with what's happened in our various markets. Starting with China, a second quarter where there has been a growth of 20% in vehicle production. The beginning of the year was slow with a negative first quarter, but it picked up after March, and especially April, and this is attributed to the incentives implemented by the regional governments and the reduction in COVID-19 contagion. On a national level, there's also the extension until the end of 2027 of the tax exemption on registrations for electric vehicles. Talking about CIE, and in spite of a clear market underperformance, our EBITDA margin for the quarter has grown up to 18.5%, in line with the consolidated levels. Thanks to the teams focusing on operating efficiency and productivity, showing once again our capacity to adapt to the median and our firm commitment to profitability. Europe. During the second quarter, the European market has grown 15%, reflecting the gradual normalization of the supply chain, including the supply of semiconductors. European market faces the challenge of the aging of its fleet, with an average age of over 12 years, an aging that has been observed in the private fleet, but also in the rental vehicle fleet, which has suffered a reduction in supply in recent years due to the lack of supply. Now, both the rental fleet and the private fleet are showing slight improvements in availability, a factor which, without a doubt, is helping to drive volumes. Meanwhile, for several quarters, we've been reading worrying data from CLEPA, the European Association of Automotive Suppliers, stating that almost 70% of the European suppliers are operating with an EBIT below 5%, a figure that shows how European suppliers and especially the small -- medium-sized Tier 2s that make up our competitive scenario are suffering. And this takes them to pick up projects at very low prices, and this goes into a vicious circle of poor commercial decisions and low profitabilities and unsustainable circle. This is our context. And in this context, we can see how our plants in the second quarter have not grown as much as the market, but our EBITDA has. Our EBITDA has grown 17% and has reached 11% margin, closer to the consolidated levels. The highest -- higher market volumes and the lower energy prices have been some of the relevant factors in improving the margins of many of our European plants. Talking about North American, during the second quarter, the production of vehicles has shown a significant growth of 15%, a growth that is attributed to a large extent to a strong demand, a demand that is reflected in factors such as the low discounts under the OEM supply. They're under $2,000, and factors as such as the maintenance of low inventory levels. We should also highlight the very positive impact of the famous IRA program. As a figure, 65% of the electric cars sold in the first quarter in the United States were eligible for the IRA incentives. And the normative update carried out by the government in April did not bring in major changes. It's also expected that the vehicles that are currently not eligible will be in the future, according to all the strategic plans that are being launched by the OEMs in the United States. Our North American division is somewhat behind in this quarter compared to the market that has achieved a growth of 15% in EBITDA, thus maintaining a margin of close to 19%. India. In the second quarter where the market has continued to grow, an increase of 3% in vehicle production, and this leaves us with the half year over plus 6%. The growth improves the strength and resilience of the Indian market in times of global uncertainty. It's to be especially highlighted that in May, a historic landmark was reached in wholesale vehicle sales in India with a 15% a year-on-year growth, which shows that the demand for passenger vehicles in India continues to outbreak all the barriers. We also have to bear in mind that in this second quarter, there has been a favorable passenger vehicle context, as we said, but that's favorable in other segments such as motor bikes, trucks or tractors. But the estimates indicate that demand in these other sectors is beginning to recover, and this means a -- potentially even greater expansion for CIE in India, both in sales and in margins. This is the context. And in this context, we have seen a significant growth of our plants in India in the second quarter, and especially an EBITDA that has grown by 14% up to 17.6% margin, already close to the consolidated levels. We would also like to mention that in India, we have taken strategic measures in favor of green energy. Signing an agreement with a producer of solar energy to establish 2 photovoltaic energy plants -- [ supplier ] plants at Urse and Bhosari, an investment in renewable energy that not only reduces our carbon footprint, but also reinforces our commitment to sustainability and the green economy. And finally, we're going to talk about Brazil. During the second quarter, vehicle production has grown 3% with positive and negative factors that are having an impact on the market. On the one hand, a positive factor, major tax discounts have been implemented ranging between 1.75% and 11% of the value of the automobile to mitigate the impact of the major rise in interest rates. Interest rates that in Brazil in 2020 were around 2%, in 2021, they went up to around 5%, 6% and are currently close to 14%. But on the other hand, we have a negative factor, and that is that exports have weakened and have fallen in this first half by 8%. In this context, our organic growth -- the organic growth of our plants in Brazil in the quarter has been almost 20 points, exceeding the market by far. With the support of the major exposure, we have 2 successful OEMs in the country. Additionally, we have had another 6 points of inorganic growth in this case, thanks to the integration of Iber-Oleff, 2 important landmarks in this semester in our Brazil division, and we can mention them later on during the Q&A. The above-mentioned acquisition of Iber-Oleff, a company that is specialized in manufacturing plastic components, an integration that provides access to both Asian and European and American OEMs and allows a significant growth with limited investment. Thanks to the synergies that Iber-Oleff has with our Brazilian plastic divisions, we have also opened a new and plastic plant in Pernambuco, thereby reinforcing our position at the country. All this has helped our EBITDA to grow in the second quarter by 34%, up to a margin of 20.5%. The global situation. The combination of the various markets has led to a result in the second quarter with 22 million vehicles produced and an increase of 16%, and this represents a half-year of 43 million vehicles produced and a growth of 11%. CIE in the second quarter has not grown at the same rate as the market, basically slowed down by our performance in China. But with this market background, we maintained a stable organic growth of 9% both in the first and the second quarter, exceeding EUR 1 billion in quarterly sales for the second consecutive quarter in our new perimeter with the discontinuation of the German plants. We present a second quarter with an EBITDA of EUR 185 million, which represents a growth of 14% in comparison with the same period last year, and it breaks the EBITDA margin barrier of [ 18% ], taking it up to 18.4%. And it even shows the highest quarterly EBITDA in our history, which is a special merit bearing in mind that the market is still below pre-COVID levels. And the big headline is that in 2023 we are obtaining double-digit EBITs in all geographies, both in the first quarter and in the second quarter. We also present a net income of EUR 88 million in the second quarter and EUR 178 million in the quarter. Our half-year result that -- has been the highest with a profit that shows that we know how to make the most of the different impacts in the market dysfunctions in the various geographies and for the various customers. Regarding the balance sheet and the operating cash flow, we have generated EUR 230 million so far this year, EUR 117 million of [ them ] in the second quarter. We're talking about an EBITDA conversion rate to operating cash of 65%, completely in line with the goals in our strategic plan. The net financial debt has gone down by approximately EUR 90 million during this first quarter, leaving an adjusted net financial debt balance of EUR 1.182 billion, a leverage ratio of 1.7x, net financial debt-to-EBITDA, a ratio that has evolved in a very positive way in the last 12 months going from 2.3 in June 2022 to 1.7 now, which shows a leveraging of around 4.5x per year. A reduction in net financial debt in the last quarters, which is a special merit, bearing in mind that it includes variables, such as growing dividends that we're paying out to our shareholders, or for example, the shutdown of the Iber-Oleff operation. And looking at the future, according to the IHS estimates, we obtained a growth in the market, growth in 2023 of 5% to a production of almost 87 million vehicles with very different situations. That has to be said. If we have [ Europe ] with a figure of 10%, India with 7% or China with a more contained trend of 1%, 87 million vehicles that represent a level of 3% below the 2019 pre-COVID figures and 9% below the peak volumes of EUR 95 million in 2017. Bearing in mind the situation of the various geographies, there is a consensus in the sector around the fact that these volumes seem attainable. We've already mentioned on previous occasions the [ law ] of car ownership ratios in emerging countries is one of the main growth drivers. But also in the mature markets like Europe and United States, where there's more uncertainty about a possible recession, in those areas too, we see elements that's foreseeable will make vehicle demand grow. And some of them, for example, are the fact that in an environment of economic recession, combined with the normalization in supply is foreseeable that the price and the vehicle mix will suffer, but not the volumes as such, or not so much of the volumes as such. To this, we have to add, and I mentioned the age of the fleet and the replacement driver, et cetera. Right now, the figures tell us that there is demand in the pipeline in the United States and Europe with an OEM order book that have been published and are not yet normalized. In the case of the United States, it's very interesting to see how the volume of used vehicles has not shot up in view of the lack of new vehicles. So this means that there is a demand that is waiting for new vehicles. And then we have the general context of trends in electrification, autonomous driving, new technologies in the vehicles, that point to a wish of the consumers to have more modern and more updated vehicles. This scenario means that at CIE we will continue to invest in key opportunities and strategic opportunities with the goal of maintaining our profitable growth and with the aim of consolidating our position in the industry, especially in those high-growth markets. Based on these magnificent results in the second quarter, we can confirm a growth in sales, a growth in results for 2023, including margin expansion. And we please have to give merit to the growth in net profit in spite of an environment of high and growing interest rates. So we come to the end of the presentation from us and move on to the questions where today, we have our CEO, Jesus Maria. Thank you all very much for your time. And, Juan, we'll move on to the questions.

Yes. Perfect. There are several questions that have been repeated and many are interrelated. We're grouping them together so that they will be -- they'll make sense and be more efficient. We start with questions on the underperformance in the second quarter. Is there any change in trend or is there any geography we should look at in particular? Is it a one-off?

It's a one-off that has an explanation apart from what was said by Lorea. First of all, at the presentation, if you look at the bottom, Spain has made a reclassification of companies in North America that were accounted for in Europe or India. But now we have considered them in 2023 in North America. And so the reading may be different to what we presented. And last year, apart from Brazil that has shot up, we can see that Europe is growing with the market, India is growing more than the market. And apart from China, we've seen that in North America, we've had a substantial drop, and this drop is due only and exclusively to the fact that last year we had a very significant turnover from new projects in the dye sector, not in parts, components which is our core, in dyes, if we analyze only the component issue, the parts produced. Also in these first 6 months, we would be growing more than the market. So it's been a temporary non-recurrent issue and we will see a CIE growing more than the market in the future.

Now we have several questions about China. I'll start with the first one. In view of the continuous underperformance in China, have you considered any change in strategy for our Chinese customers?

Well, first of all, I would like to share some information. Our sales in China, 50% of the sales are aimed at Chinese customers that have a [ JV ] with western companies. 40% of our sales go to Western customers and 10% for Chinese customers. It's true that these Chinese customers have evolved very significantly in recent years. And that is why our R&D department is developing products that are lower in cost, which is what they demand, obviously, with less technology. But they want a cheap product, and that's what we're working on, developing various products to be able to grow with those Chinese customers and to be able to continue to maintain the same margins, which, as you've seen, and they're very good in China.

And thinking about outside China, but related to China, there's a question about -- well, we're seeing many -- a lot of news about China leaving China and going to other countries, mainly in Europe. How are we affected by the entry of Chinese OEMs, both in Europe and in the other geographies?

Well, I've just come back from Brazil. And Chinese OEM is currently negotiating with the government of Bayer to acquire the plant that Ford shutdown a few years ago. And you know that we still have our plants there, and we're being [ bought ] by both the government and customers. And for us, it would be a magnificent news to have a final agreement because, as I said, we have plants and staff and all the technological know-how in that geographic area where there aren't many plants that can supply components to these Chinese customers. And this Chinese customer I mentioned may also acquire a Ford plant in Germany, but we are convinced. Look, like in other geographic areas that have come to Europe, they are always going to have to consider the customers in Europe in this space. So it would be a further customer and it would be a problem to be able to serve them, and it would be a pleasure to do so, obviously.

Well, we move on to a question about margins. [indiscernible], what has the impact of the pass-through be on sales and margins in this semester and how are we are seeing the price situation with the OEMs, the price pressure?

Well, that's something we have to look at every day. There's no change. Regarding the pass-through, there are geographic areas that have had a drop in raw materials. Others have increased, especially in North America, we've analyzed the figures. And in general, there's no repercussion right now on a global level, on a consolidated level. And that's why we didn't mention anything about the pass-through because it doesn't have an effect.

Another -- different question. Can you tell us what the EUR 9 million in interrupted activities this quarter?

As you'll remember, in December 2022, our Board made the decision of phasing out the German forge business. And both in the first quarter and the second quarter of the year, you've seen the result of the German business on the phased out activity line, a result which on a half year level represents EUR 16 million. And if you've had the opportunity of listening to the conference by our listed company, CIE India, they explained that most of that amount was related to the insurance that we have been paid for the floods in 2021 and on the losses we suffered. It's related to an insurance amount and some energy issues we had in the quarter 2. So answering the question, that is the result of the German activities that have been phased out and up for sale. And I hope that we'll be able to give you good news soon. We can't say much more, but we expect a good news soon.

Looking more to the future, we're asked about the second half, considering the IHS estimate point to a market within the second half of the year will be very similar to the first half, what do you expect in the second half?

Well, there are many things here, performance, margins, financial costs.